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Arra White Paper V3


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ARRA Obama Stimulus Strategy White Paper

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Arra White Paper V3

  1. 1. MARCH 2009 B2G Advisory Services STRATEGY & MARKET SUPPORT A $787 B Glass Half Empty or Half Full? How Business Leaders can Strategically Approach the ARRA for Maximum Success From C-level corporate leaders to general managers, entrepreneurs, program managers and investors, there is universal interest in the potential opportunities presented by the recently passed American Reinvestment and Recovery Act (ARRA). At a time when there appear to be so few avenues for new growth, the size, diversity and rapid rollout of the plan make the stimulus bill simply too important for companies to ignore, whether they are long-standing government suppliers or new entrants exploring potential growth areas. With funding flow- ing to such diverse areas as alternative energy, health information technologies, and infra- structure projects, a broad spectrum of players is examining its potential near- and long- ABOUT THE AUTHOR: JON BARNEY term strategies and the challenges associated with implementing those strategies. PRINCIPAL TRADITIONAL RESPONSE Jon oversees strategy and consulting engagements for Over the past decade, when there has been a significant increase in government spending in aerospace and defense cli- response to a national emergency (e.g., 9/11, the war in Iraq, or Hurricane Katrina), compa- ents. Jon has been published in the Harvard Business nies large and small have responded by pursuing a fairly consistent menu of strategic initia- Review and was a speaker at tives to capture a share of this new federal funding (Figure 1). the World Economic Forum in 2004. Unfortunately, these traditional responses have often yielded less than optimal results not For further information only for the companies that have tried to implement them, but also the public sector entities please contact : they sought to serve. THE AVASCENT GROUP 1225 EYE STREET, NW #400 WASHINGTON, DC 20005 (202) 452-6990
  2. 2. Figure 1: Traditional Approaches to Capturing Emergency Government Funding Action Pros Cons “Throwing” massive resources in Large scale gives a new market/project visibility …but scale replaces strategy akin to a soccer pursuit of opportunity and importance internally… game of seven year olds – all chase the ball and nobody is open Silo approach to new markets Pushes market generation ideas to business …but there is limited coordination across the levels… company New product development Results from creativity and entrepreneurship in …but at times due to inadequate processes, an emerging market… the optimal product solution does not find the customer Focus on playing in multiple mar- Aggressive strategy is a powerful driver for com- …but leads to lack of focus and results in not kets pany growth… performing well in any specific market Businesses acquired in developing Present opportunity to acquire talent and prod- …but often the acquired businesses’ products markets ucts that give a dramatic new capability… and models are not fully understood – which leads to both paying too much and unsuc- cessful integration Promise to over-deliver to the end Stretch targets and desire to make customer …but often at the expense of ill-defined re- customer: the government satisfied are important…. quirements and limited ability to adjust proc- ess once off-track Purely tactical approach to markets Additional focus around the specific opportunity …but often leads to getting a short-term con- and growth at hand… tract “win” but not building a long-term busi- ness or industry ultimate attractiveness of which depends as much on future WHAT MAKES THE 2009 ARRA DIFFERENT policy choices and private sector efforts as it does on the While the realities of doing business with the government immediate funding provided through the stimulus package. will not change overnight, there are specific reasons why a Scale. As illustrated in the chart below, ARRA will result in distinctive approach will be required when addressing the hundreds of billions of dollars of new spending over the potential opportunities contained in the ARRA. To a course of the next two years. If, as is intended, this funding greater extent than the previous cases of rapid increases in federal spending cited above, the ARRA involves a degree of Figure 2 complexity, scale, pace of implementation and transparency Where the ARRA Money is Going that is wholly unprecedented. Complexity. While some aspects of the ARRA are relatively $288 B Tax Relief straightforward (e.g., tax relief, aid to state and local gov- State & Local Fiscal $144 B ernments), the elements of most direct interest to industry Relief pose complex challenges for decision-makers. Beyond seek- Infrastructure & Science $111 B ing to stimulate growth by simply funding government con- sumption, a number of the initiatives seek to promote the $81 B Protecting the Vulnerable emergence and growth of new technologies and industries. This will require a significant degree of innovation by in- Health Care $59 B dustry and a willingness to tackle the complex strategic Education & Training $53 B challenges associated with emerging, yet unproven market opportunities. The closest recent analogy is the growth of Energy $43 B the homeland security market in the aftermath of 9/11. However, with its focus on health, energy, the environment Other $8 B and infrastructure, the ARRA cuts across far more areas, the Source: THE AVASCENT GROUP 2
  3. 3. serves as a stimulus for further private and public invest- of the government will be around “doing things right.” As a ment, the long-term potential opportunities could be sig- result, the ARRA will likely be carried out within an envi- nificantly larger. Even beyond the simple dollar value of the ronment that places a premium on careful scrutiny and ac- countability, regardless of whether these ambitions are well- ARRA itself, the scale and sweep of the various initia- aligned with the goal of rapid implementation. tives are dramatic. As the new Administration has made clear, the ARRA is intended to have significant and A RIGOROUS APPROACH IS ESSENTIAL far reaching impact across a number of critical industries, For industry, there is an urgent need to recognize that old from energy to healthcare. By seeking not just to stimulate approaches to capitalizing on the opportunities presented these industries, but to fundamentally affect their future by increased government spending are likely to be unwork- direction, the scale of the impact of the ARRA is potentially able this time around. Jumping in vast. While the near term focus is For industry, there is an urgent need quickly – or standing on the side- on the ARRA and its implementa- lines – carries far more risks given tion, the scale of the long-term to recognize that old approaches to the ambitious nature of the Ad- market potential is far more sig- capitalizing on increased government ministration’s stimulus efforts. In nificant that the stimulus bill itself. spending are likely to be unworkable this environment - akin to building Pace. The passage of the ARRA an airplane while flying it and be- this time around marks the largest domestic spend- ing evaluated publicly on success in ing initiative by the US govern- real time - a more systematic proc- ment since The New Deal. Moreover, the bill became law ess is required for evaluating opportunities and developing less than 30 days into the new Administration’s tenure. The a coherent strategy. Despite the pace of current events, sen- difficult work of implementing its provisions is moving just ior executives must pursue an approach that focuses on as quickly, with plans for contract award and reporting re- solid data, analysis, strategic innovation, coordination and quirements being developed. Under ambitious timelines, execution. departments and agencies would start awarding projects by The process outlined below meets these requirements by the end of the second quarter 2009. There are parallels in first focusing on developing (i) a rigorous External Market recent years to this implementation timetable (9/11 recov- View of ARRA-driven opportunity space; (ii) a streamlined ery and response, Iraq, and Hurricane Katrina). However, Internal Capabilities Assessment; and finally (iii) a coordi- the pace envisioned for executing the ARRA – combined nated Action Plan. Ideally, an executive team would follow with its scale and complexity and an entirely new leadership the entire process end-to-end, but it is designed in a modu- team – makes this an entirely unprecedented endeavor. lar fashion such that a new market entrant can focus quickly This raises considerable questions regarding how efficiently on particular components if needed, and still move seam- and effectively the ARRA is likely to be carried out, thus lessly across the entire process. posing challenges for how industry positions itself for the near- and long-term. EXTERNAL MARKET VIEW Transparency. In response to the perceived excessive se- The first task is to clearly and systematically answer the crecy of the Bush White House, and the abuses associated question; what does the external landscape associated with with previous emergency spending efforts (e.g., Iraq, the ARRA opportunities really look like? This involves four Katrina), the Obama Administration has made greater key analytic activities. transparency a central tenant of its governing philosophy. 1. Review and Dissect the Plan. Although the need is obvi- This emphasis on transparency has only been reinforced by ous, the process of deeply understanding the content and the current global financial crisis, which many inside the implications of the ARRA is not entirely straightforward. Administration view as at least partially the result of a lack The scale and scope of activities requires a systematic as- of transparency. With the creation of, sessment, preferably breaking it down by specific market which will document ARRA spending in excruciating detail, segment and sub-segment for each potentially viable oppor- the Administration has promised the public that the focus THE AVASCENT GROUP 3
  4. 4. tunity space. Moreover, it is critical to understand the scale for them to play. A hypothetical company that produces and timing of potential awards, responsible agency or agen- advanced technology materials may find only one compo- cies, type of funding and contracting process, and duration nent of the value chain that makes sense – e.g. in the devel- of the resulting work. At the same time, this analysis should opment of leading edge technologies to support resource consider how elements of the ARRA may or may not be extraction. Alternatively, an advanced battery producer may amplified by the broader agenda the Administration is pur- find the only place to participate is in the storage and distri- suing. In the end, it will serve as an input into the broader bution component. strategic approach. Notably, this process must be iterative In neither case would a new entrant to the marketplace and should reflect ongoing proposals and projects. likely have the core competencies to compete in other seg- ments of the market (e.g., Consumers) unless the firm were 2. Evaluate the Value Chain. In too many cases, a firm will to undergo a complete reinvention. By breaking down the jump directly from its initial opportunity assessment to exe- value chain, companies will be better able to focus on the cution planning, without taking the time to systematically opportunities that present realistic paths forward. understand where its potential play might be strongest. However, as a starting point for an entry into an evolving 3. Component Breakdown. Once the value chain is dis- market, an analysis of the market’s value chain is essential. sected, a more complete breakdown of the market dynamics This applies to all new sectors affected by the ARRA, around a particular segment is essential. This must cover all whether in energy, health IT, infrastructure, or homeland of the typical strategic questions of market size, technology security. trends, customers, major competitors, and barriers to entry. By way of example, the following diagram (Figure 3) illus- As an example, for the aforementioned advanced battery trates a high-level value chain for the energy sector. Given producer, a key area of focus along the value chain could be the complexity, scale, and global reach of the industry, com- the “Storage” segment with an eye toward understanding panies must choose carefully where it makes the most sense the power generation market in solar and fuel cells. Figure 3: Sample Value Chain Energy Market Value Chain Energy Market Value Chain Efficiency Improvements Incremental changes/improvements in the field generate efficiencies across the cycle Power Lifecycle Resource Resource Distribution Storage Consumers Waste Waste to Phase Generation Extraction Refining Disposal & Energy Remediation Key Industries Oil and Gas Battery, Auto Individual Exploration, Oil and NG Public Firms, Public Waste and Involved Industry, homes, Nuclear, Coal, Extraction, Refiners, Utilities, Utilities, byproducts Chemical, industry, other Carbon- Mining, Biofuel Factories, Transport & Power Public utilities, based Energy Agro- Producers, Individuals Logistics generation Utilities government business, Chemical Industry Competitor Activities Engineering, Research RDT&E Engineering, RDT&E Limited Major Provider Limited to Date Logistics, & and Support and Logistics, & Support and RDT&E to Government RDT&E Transport Development Limited Transport Limited Customers Support Support Production Support Production RDT&E Research and development bring about improvement across the value chain THE AVASCENT GROUP 4
  5. 5. adjacency. Ideally, any new opportunity will be both suffi- 4. Opportunity Analysis. The final step in understanding ciently large and sufficiently close to the core business that the market potential is to assess opportunities identified it should clearly be pursued. For the hypothetical battery through the value chain and market segmentation along manufacturer, the Advanced Battery Technology initiative two criteria: ROI and segment complexity. All opportunities is an obvious case in point. Equally obvious, businesses are not created equally based on either potential return or with lower and riskier ROIs that are not close to the core on ease of entry. Depending on a particular company’s risk should be avoided. The primary challenge comes from the profile, R&D capabilities, manage- opportunities that are somewhat ment team, etc, different ap- While each opportunity is unique, it outside the core, but nevertheless proaches to different technologies is essential to not underestimate the are sufficiently large that they be- will be required and a mixed ap- come intriguing. proach of near-term small wins challenges involved in moving to an may be combined with longer- While each opportunity is unique, unrelated market term, potentially riskier but higher it is essential not to underestimate return bets. A critical question, the challenges involved in moving therefore, is whether a new entrant could succeed through into an unrelated market, even if it has a long-term poten- application of existing or evolutionary innovations or tial return. Such a challenge may be manageable for some whether success would demand dramatic, revolutionary businesses, but not for all. As a result, companies should err breakthroughs. on the side of staying closer to the core regarding ARRA opportunities rather than pursuing distant opportunities in INTERNAL CAPABILITIES ASSESSMENT hopes of staking footholds in unconnected market areas. Having surveyed the external landscape, the analysis must 7. Review of the Gaps. For both current and potential cus- turn inward to clearly assess how well existing business tomers, real-time market feedback regarding ARRA oppor- models and capabilities are aligned with the emerging mar- tunities needs to be evaluated. This is especially true for ket opportunities. The core question therefore becomes: markets that are still evolving, where few players really have “How is my business positioned today relative to the emerg- a grasp of market dynamics. This type of customer discus- ing ARRA opportunities?” sion should focus on the specific market segments that have 5. Vision Alignment. While there may be tremendous op- risen to the surface based on the analysis conducted to this portunities for some businesses in health IT, alternative en- point. It should be designed to support or refute what by ergy, infrastructure, or cyber-security, all companies need now should be a considerable focus on a few select market not play in all areas, particularly if it represents a move into opportunities. Key questions to be asked include the follow- a wholly unconnected line of business. Making this choice ing: comes down to a fundamental discussion of the company’s  Who are your suppliers, customers, and partners vision and a review of where it wants to be in the future. today? Consequently, regardless of the lure of near-term revenues, the firm’s senior leadership must ask two basic questions:  What are your key interests/needs around ARRA Is the emerging business sector(s) in my core business opportunities (e.g., Advanced Battery Technology, Advanced Storage Techniques, Fuel Cells, etc.) – today? cost reduction, quality, productivity, etc? If it is not in my core, do I want to change my core  Where is your business going with respect to this business in some way and invest significantly in new new technology/market? sectors?  When (if at all) will your business be impacted by 6. Evaluate Adjacency. Once respective ARRA opportuni- this changing market that is being impacted by the ties are determined to be part of a current or future core ARRA? business, the next step is to evaluate the closeness of the THE AVASCENT GROUP 5
  6. 6.  How can our business help you with regard to this Figure 4 changing market? ARRA Organizational Models ARRA Organizational Models  Why would you want to change the way you do Incubator Integrated business today in response to these changing tech- Parent Company Parent Company nologies? 8. Your Business or Outside Acquisition. A final step be- New New fore moving to implementation is to evaluate the potential Business Business segments and determine whether partners or acquisitions will be necessary to penetrate the identified ARRA opportu- • Develop & Grow within • Develop & Grow outside existing structure current structure – but with nity space, as it is often the case that the internal capabilities expectation integration • Best utilized when analysis highlights deficiencies in areas core to the market occurs emerging business “fits” in question. closely with an existing • Best utilized when the product, strategy, and emerging business organizational support To the extent that acquisition of new capabilities is deemed represents a “step change” from existing strategy or essential, senior leadership should execute a systematic product mix or if new leadership is needed process for identifying prospects. This “funnel exercise” will screen the universe of potential targets by a number of key criteria such as range of revenue, product, company per- portunities, the initial reaction is often to try and jump at formance, location, and customer base. When conducting many of them at once, but this will not lead to long-term the funnel approach, the “front end” should be sufficiently success. A more effective approach would be to ask several large to ensure a complete picture of the landscape is questions before moving ahead: achieved. In addition, the “back end” should be sufficiently  Am I today or can I become a market leader in this small with robust and discerning criteria so only a handful particular emerging business? of relevant profiles remain. The key to any such effort will  Can I deliver products and services around this op- be speed given the pace of the market’s development. portunity as early as mid 2009 and continue aggres- ACTION PLAN sively through late 2010? Having determined that there are attractive opportunities  Do I have a team in place right now that can get me for the firm within the ARRA, the next set of questions is there and if not, am I confident I can find the team centered on the following: “How do we develop and execute who can? a winning strategy?” 11. Assemble Integrated Team. One common weakness of 9. Placement within Organization or Position. Many of pursuits of large government awards in recent years - such these ARRA-supported opportunities will require signifi- as those resulting from Iraq, Katrina, and 9/11 - is an unco- cant changes in terms of product offerings, business models ordinated “silo approach.” This approach is in many cases and corporate strategies. Whether a Fortune 100 business or driven by a strong point person (e.g., business development a technology-driven start-up, the question of how to struc- or capture) that nevertheless lacks a supporting cast with ture itself organizationally to pursue these new opportuni- other critical competencies. As a result, the organization as ties will be critical. Given the need for speed and innova- a whole lacks the ability to bring its full capabilities to bear. tion across these segments, senior management must ask Typical pitfalls of this approach have included: the hard question as to whether the existing structure will  Significant over-selling of capabilities by the busi- support and enhance the growth of an emerging area. If ness development organization without coordina- not, then the firm should explore how it might “incubate” tion by the team actually delivering the products and the business separately. services; 10. Limit Scope. Given the sheer scale and diversity of op- THE AVASCENT GROUP 6
  7. 7. Figure 5: Optimal Organizational Design Business Function Common Pitfalls Optimal Roles Directive in approach to opportunities Coordinate activities of team members such as C Level strategy Develop strategies without business/technology feed- Size markets, partners, and opportunities Corporate Strategy/M&A back loop based on strong business input Have strategies directed to them which limits effective- Drive the activities and work closely on the Program Managers ness front end Success in winning business but over-commit capabili- Coordinate with other components of team so Capture Support ties not operating in a silo Strong on “identifying dollars” but limited scope in de- Become a more strategic partner to evaluate Washington Operations veloping overall strategy opportunities instead of tactically “looking for dollars” Often operates in a silo outside of the business deci- Bring in early in the process to evaluate viabil- CTO sions and brought in only when technical problem oc- ity of potential new opportunities curs Often does not exist Some top performers need to be devoted to Rapid Response Team the rapid winning and delivery of projects Becomes engaged only when there is a specific talent Engage earlier in process to predict where Human Resources shortage talent shortfalls could occur Reactive when a problem occurs Assign at the front end and keep highly en- Compliance gaged at all times  Top down approach to opportunities in which a di- stage for process and regulatory breakdowns. rective is given at a senior level to pursue an oppor- Despite the calls for urgent action, firms must recognize tunity without having an underlying analysis by rele- that the constraints and scrutiny inherent in government vant team members as to whether it makes sense; contracting will not go away. Indeed, the President has and made it clear that every dollar spent will be subject to un- Limited feedback mechanism and checks/balances precedented transparency and accountability. For those able to build the processes and procedures to execute because only one portion of the organization is highly within this environment, the opportunities will be substan- engaged in the new opportunity. tial. However, firms that place expediency over careful In response to ARRA, a significantly more integrated ap- compliance are likely to find that their actions undermine proach should be implemented to optimize the chances for their long-term prospects, even if they lead to short-term success. This includes coordination across the C-level lead- gains. ership, technology heads, government operations experts, CONCLUSION business development and capture leaders, corporate devel- opment, human resources, and compliance. The ARRA represents both a unique challenge and a tre- 12. Nail Execution. Once the decision has been made to mendous opportunity for companies that can innovate, move forward with particular opportunities from the deliver, and effectively manage growth. It will immediately ARRA, execution becomes critical. While the systematic fund and potentially cause significant growth in innovative process outlined above should improve the odds of success, sectors in the future such as alternative energy, health IT, there remain considerable execution risks that must be and infrastructure. An analytical and systematic approach managed carefully. These risks will be amplified because the will not guarantee success but will reduce the likelihood of government will be trying to execute programs on a scale pitfalls for both companies and the government that have and scope that will strain their capacity, hence setting the occurred. over the last decade. THE AVASCENT GROUP 7
  8. 8. THE AVASCENT ADVANTAGE The Avascent Group is the leading management consulting firm specializing in serving senior executives in the defense, aerospace, homeland security, logistics, technical services and infrastructure sectors. Avascent provides a full range of man- agement consulting services, from strategic planning to market analysis to organizational and operational improvement. Our consultants combine our deep market knowledge with proven rigorous market validation and strategic planning meth- odologies to provide invaluable decision support to our clients. THE AVASCENT GROUP 8